Mortgage Mayhem: Fairy Tales on the Housing Market

Treasury Secretary Timothy Geithner is good at telling fairy tales. Mr. Geithner first became known to the general public in September of 2008. Back then he was head of the New York Federal Reserve Board. He was part of the triumvirate, along with Federal Reserve Board Chairman Ben Bernanke and then Treasury Secretary Henry Paulson, who told Congress that it had to pass the TARP or the economy would collapse.

This was an effective fairy tale, since Congress quickly handed over $700 billion to lend to the banks with few questions asked. Of course, the economy was not about to collapse, just the major Wall Street banks. To prevent the collapse of the banks Congress could have given the money but with the sort of conditions that would ensure the financial sector never would be the same. Alternatively, it could have allowed the collapse and then rushed in with the liquidity to bring the financial system back to life.

But the Geithner fairy tale did the trick. Terrified members of Congress tripped over each other to make sure that they got the money to the banks as quickly as possible.

Now Geithner has a new fairy tale. This time it is that if the government imposes a foreclosure moratorium it will lead to chaos in the housing market and jeopardize the health of the recovery.

For the gullible, which includes most of the Washington policy elite, this assertion is probably sufficient to quash any interest in a foreclosure moratorium. But those capable of thinking for themselves may ask how Geithner could have reached this conclusion.

The point of a foreclosure moratorium would be to ensure that proper procedures are being followed. We know that this is not the case at present. There have been several outstanding stories in the media about law firms that specialize in filing documents for short-order foreclosures. They hire anyone they can find to sign legal documents assuring that the papers have been properly reviewed and are in order.

In some cases, this has led to the wrong house being foreclosed. People who are current on their mortgage, and in one case did not even have a mortgage, have been foreclosed by this process. The more common problem would be the assignment of improper fees and penalties to mortgage holders. Or, in many cases foreclosures have probably occurred where the servicer did not actually possess the necessary legal documents.

A moratorium would give regulators the time needed to review servicers’ processes and ensure that they have a system in place that follows the law and will not be subject to abuse. This is the same logic the Obama Administration used when it imposed a moratorium on deep sea drilling after the BP oil spill.

No one can seriously dispute that there is a real problem. Three of the largest servicers – Bank of America, JP Morgan, and Ally Financial – have already imposed their own moratorium to get their procedures in order. This is just a question of whether we should have regulators oversee the process or “trust the banks.”

If the argument for a moratorium is straightforward, it is difficult to see any basis for Geithner’s disaster fairy tale. If there were a moratorium in place for 2-4 months then banks would stop adding to their inventory of foreclosed properties.

But most banks already have a huge inventory of unsold properties. Presumably they would just sell homes out of this inventory. This “shadow inventory” of foreclosed homes that were being held off the market has been widely talked about by real estate analysts for at least two years. It is difficult to see the harm if it stops growing for a period of time.

Of course it actually was the Obama Administration’s policy to try to slow the process of foreclosure. This has repeatedly been given as a main purpose of its HAMP program, the idea being that this would give the housing market more time to settle down. Now we have Geithner issuing warnings of Armageddon if a foreclosure moratorium slows down the foreclosure process.

It doesn’t make sense to both push a policy intended to slow the foreclosure process and then oppose a policy precisely because it would slow the process. While this is clearly inconsistent, there has been a consistent pattern to Geithner’s positions throughout this crisis.

Support for the TARP, support for HAMP, and opposition to a foreclosure moratorium are all positions that benefit the Wall Street banks. I’m just saying.